The FRB issued a proposed rule that would impose new obligations on credit card issuers concerning penalty fees and raising interest rates. Among other things, the proposal would place limitations on penalty fees that a credit card issuer may assess. Specifically, an issuer could only charge a penalty fee if the fee represents a "reasonable proportion" of the costs incurred due to that type of violation. The proposal would require issuers to re-evaluate such costs at least annually. Alternatively, an issuer could charge a penalty fee for a violation if the issuer has determined that the amount of the fee is “reasonably necessary” to deter that type of violation, using an “empirically derived, demonstrably and statistically sound model.” In addition, the proposal would (1) prohibit the penalty fee from exceeding the dollar amount associated with the violation, (2) prohibit imposing multiple fees based on a single transaction, (3) require issuers that use risk-based pricing to increase the annual APR on an account to periodically consider changes in factors and, if appropriate, reduce the APR within 30 days, and (4) require issuers to inform customers of the reasons for their rate increases. Comments on the proposal are due 30 days after publication in the Federal Register, which is expected soon. Click here for a copy of the proposal.
Alert March 09, 2010